401K Plans

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As retirement plan specialists, Foresight works directly with businesses of all sizes to help enhance the value of the retirement benefits they offer. Through fee benchmarking, fiduciary responsibilities, an open architecture platform and participant education, we seek to ease the burdens businesses face when offering retirement benefits and lower the barriers to investment success for plan participants.

Investment performance, expense management, regulatory compliance and participant enrollment are all important benchmarks of success. But we also measure success by increasing plan sponsor confidence in their retirement benefits to attract and retain employees and provide a path toward a more secure financial future for plan participants.

A Look at 401k Plan Fees
Record Keeper – Also known as the plan provider, your record keeper is responsible for tracking participant accounts, providing statements, and maintaining website.
Record keeper fees are often paid by plan participants as a percentage of assets. Some open architecture providers offer flat dollar and per head pricing.

Third Party Administrator – Your TPA is responsible for duties involving plan administration, such as discrimination testing, 5500 tax filing, loan processing and distributions.
TPA fees are most commonly a flat dollar paid by invoicing plan sponsor unless record keeper is also performing TPA services, which allow fees to be paid from plan assets.

Financial Advisor – Your advisor is responsible for assisting plan sponsor with fiduciary responsibilities, development of IPS, investment selection and monitoring, and employee education.
One of the roles of an advisor is growing plan assets; therefore advisors are most often paid a percentage of assets, although in some cases it is more advantageous to pay advisor a flat dollar.

Investment Companies – Investment companies provide the mutual funds or exchange traded funds (ETF) charged with managing employee assets.
All investment companies are paid as a percentage of plan assets. Many mutual fund companies also kickback a portion of fees to service providers, known as revenue sharing.

Custodian – Custodian is the financial institution responsible for safekeeping of plan assets,maintaining sales agreements with investment companies and trading of participant’s funds.
Custodians are paid a small percentage of assets of flat dollar for use of the trading platform.

CPA Audit Firm – Employers with over 100 eligible employees are required to conduct an annual audit of the plan.

CPAs are paid a fee for service by invoicing the plan sponsor. Some plan providers allow audit fees to be paid from plan assets or paid by revenue sharing from mutual funds.

That should be your objective. It certainly is ours!

Quality 401k Plan
The goal of any retirement plan is for participants to reach their individual retirement goals. Unfortunately, the retirement success of plan participants has been put at risk due to excessive fees, poor investment options, and lack of education. These factors can significantly reduce participant returns and diminish account balances over time. Often times plan sponsors do not realize the devastating effects of even a small deficiency can have on employees’ success. Consider the impact of excessive fees, poor investment options, and lack of education on a 35 year old employee with a 100k balance. Assume an investment returning an 8% annualized rate of return with no new contributions his account balance would grow to $1,006,266 at age 65.

Excessive Fees
An excessive fee of 1% annually would reduce his account by $245,040 at retirement. To compensate for the fee an additional contribution of $2,594 would be required every year for 30 years or postpone retirement 4 years.

Poor Investments
Combine the excessive fees with investment options that under perform their peers by 1% annually and the employee’s account would be reduced by $431,916. To compensate an additional contribution of $5,463 would be required every year for 30 years or postpone retirement 9 1/2 years.

Lack of Education
Now assume employees are not given proper education, making bad investment decisions could cost employees another 1% annually. Compound this with excessive fees and poor investment options; an employee would see a shortfall at retirement of $574,071. To compensate an additional contribution of $8,640 would be required every year for 30 years or postpone retirement 17 years.

For employees who are younger or employees with larger account balances the damage is even greater. Add these potential problems to a decade of poor market performance and employees begin to feel hopeless about the prospect of reaching their retirement goals. Remember, cheaper is not necessarily better, and higher fees do not guarantee better investment performance or service.

The comments above are not intended to be investment advice and do not indicate how investments will perform in the future.

New Regulations for 401k Plan Sponsors
Why new regulations?
The Employee Retirement Income Safety Act (ERISA) requires plan sponsors to understand, evaluate, and control the fees inside retirement plans. It is both a breach of fiduciary duty and a prohibited transaction to allow a plan to pay more than reasonable expenses. At the same time the retirement plan industry has purposely obscured fees, making a plan sponsor’s obligation virtually impossible. In response to these concerns the Department of
Labor has finalized two new sets of regulation as of Feb 2, 2012.

What are the new regulations?
The first regulation is provider disclosure or 408(b)(2), which requires covered service providers to make written disclosure of any direct or indirect fees. Service providers must also provide a written agreement stating all services of fered and if the provider is a fiduciary to the plan. All disclosures must be made by July 1, 2012.

The second regulation is participant disclosure or 404(a)5. After the plan sponsor has received all disclosure agreements and determined all fees are reasonable, the plan sponsor must disclose all fees to participants. Disclosure must be made to participants by August 30, 2012.

What is required of plan sponsors?
To fulfill the requirements of 408(b)(2) plan sponsors are required to determine who is a covered provider and document receipt of all disclosures. Plan sponsors must use an objective process to evaluate the services provided, the reasonableness of fees, and any conflicts of interest. Any providers that do not provide written service agreements or fees are not reasonable must be terminated from the plan. Do not fall into the trap of believing your plan provider will do this for you.

Plan providers may be fulfilling the 404(a)5 requirements, but plan sponsors should be concerned about the repercussion from employees discovering the true fees associated with the plan and investments. Plan sponsors should prepare to justify the expenses verses the services the employees are receiving.

What if plan sponsors don’t comply?
If plan sponsors do not have service agreements for each provider or if fees are unreasonable; the plan sponsor will be in breach of fiduciary duties. The plan sponsor would be liable for repayment of losses from unreasonable fees and a 15% excise tax.

Foresight Group
Your employees hope for a rewarding retirement. Today more than ever, employers need help in navigating the many complex plans and retirement options, in order to offer the best solutions to their employees.

The Foresight Group can help by providing personalized service to plan participations in helping them find the right solutions to fit their needs. Our unique approach combines a thorough financial planning process and comprehensive wealth management in an independent, unbiased environment.
Our independent status means we can find the best investment for you, rather than satisfy a sales quota from corporate.

Independence
As a Registered Investment Advisory firm, we have access to a wealth of investment products and services to suit the goals of individual plan participants. As an RIA our advisors have a duty to act in the best interest of our clients, removing any potential conflicts of interest. Our advisors do not represent any proprietary products, we represent you.

Experience
The Foresight Group is comprised of a team of experienced financial advisors representing Chartered Financial Consultant’s, Chartered Life Underwriters, Certified Public Accountants, and Accredited Investment Fiduciary’s. Each member of the team specializes in various areas of financial and retirement planning. This ensures we offer our clients the best possible advice and retirement solutions.

Education
Our advisors participate in on-going education and training in order to stay informed on the latest investment options, legal issues, and product advancements. This enables our advisors to help clients make knowledgeable decisions regarding retirement and investment decisions.

Investment Policy Statement
As a plan sponsor could you justify the investment choices being offered to employees in the 401k plan?
Over the last decade most participants in 401k plans have been disappointed with the growth in their account balances. As a result plan sponsors are becoming more concerned about unsatisfied participants bringing lawsuits and potential scrutiny from the Department of Labor.

Fortunately, the Employee Retirement Income Security Act (ERISA) does not expect plan sponsor to guarantee investment results. ERISA does however, require plan sponsors to have a decision making process in place for choosing and monitoring investment options.

One of the best methods for fulfilling this requirement of ERISA is the use of an Investment Policy Statement (IPS).

What is an Investment Policy Statement
An Investment Policy Statement (IPS) is a written document providing plan fiduciaries with guidelines for operating the retirement plan. The IPS defines the responsible parties and associated duties. This includes a description of the asset classes, including criteria for investment selection, monitoring, and changes. The IPS gives the plan fiduciaries a clear an easy to follow direction for governing the company retirement plan.

Why use an Investment Policy Statement
Properly constructing and carefully following an IPS is one of the most important steps a plan fiduciary can take to demonstrate a prudent investment process. An IPS can help protect the plan sponsor from potential fiduciary liability. An IPS is one of the first things the Department of Labor will ask for during a plan audit. Aside from fiduciary protection an IPS also helps to improve the quality of investment choices for plan participants thereby increasing employee satisfaction.

How to use an Investment Policy Statement
An IPS reflects the unique investment criteria of each plan and therefore should be custom designed by an experienced advisor who is knowledgeable about the prudent investment management process. Written monitoring reports should be generated and compared to the IPS criteria on a regular basis, preferably quarterly. Any concerns or necessary changes should be documented and implemented by an experienced advisor or the plan fiduciary.

Participant Support
On-site Group Enrollment – Plan participants are offered enrollment meetings at the worksite to educate and enroll employees into the plan. The service greatly reduces the burden on the plan administrator and helps with a smooth transition.

On-Site Group Education – Education is one of the most important factors in achieving employee satisfaction in regards to the retirement plan. One of the best methods is onsite group education meetings. The goal of these meetings is for employees to gain a good understanding of general investment concepts and retirement planning strategies.

Individual Employee Meetings – Although group meetings are good for general education is important for employees to have access to an experienced financial advisor for individual questions. Plan participants are given the opportunity to meet with a licensed financial advisor one on one to discuss their individual circumstances and develop a custom plan for their situation.

Financial Education Classes – Often employers would like to offer more education events to employees but it can be hard to organize employees or take company time. Financial classes offered after hours and outside of work can be a good solution. All employees and spouses are invited to attend classes discussing various financial topics such as budgeting, debt reduction, and retirement planning.

Market Updates – Every week plan participants are emailed a brief update on the economy and the markets. These emails are written in a way that benefits both beginner and advanced investors.

Financial Education– Employees are emailed regular newsletters and educational pieces discussing various financial topics. These emails target certain financial topics meant to help educate and motivate employees for retirement.

Custom Website– Employees are given a custom website so they can easily locate information about the 401k plan in one central location. Employees are given a list of contacts for questions as well as links to websites and paperwork.

Trustee Support
Fiduciary Support – Any plan sponsor who lacks the knowledge and experience to properly manage investments is required by ERISA to hire a knowledgeable advisor. It is critical to hire an advisor who has the knowledge and experience to help mitigate any fiduciary liability.

Investment Policy Statement – An Investment Policy Statement (IPS) is a written document providing plan fiduciaries with guidelines for operating the retirement plan. Properly constructing and carefully following an IPS is one of the most important steps a plan fiduciary can take to demonstrate a prudent investment process.

Quarterly Investment Monitoring – A plan fiduciary should hold regular investment committee meetings to fulfill the responsibility of monitoring the investment options in accordance with the IPS.

Fiduciary Audit File – A plan fiduciary must document a prudent process is being used to govern the plan and maintain ready access to all documents involved in the process. Afiduciary audit file contains information such as, summary plan description, investment policy statement, service agreements, committee meeting notes, plan benchmarking and reviews, and bonding information.

Plan Design – Plan design is the first step toward a successful retirement plan. Effective plan design can increase participation and reduce costs as well as administrative burden. Plan design should be monitored regularly as plan assets and participants grow. Fee Benchmarking and Review – Not only is this practice required by the Department of Labor it is also the best method to keep plan expensed low. Fees for services and investments should regularly be assessed and benchmarked against what is available in the retirement plan industry.

ERISA and DOL Compliance – Plan sponsors must stay apprised of the many regulations and rules that are ever changing in the retirement plan industry. Plan fiduciaries must also maintain a prudent process to demonstrate compliance with all regulations.

Importance Of A Fiduciary Advisor
ERISA (Employee Retirement Income Security Act) requires a plan fiduciary to act with the “care, skill, prudence and diligence under the circumstances than prevailing that a prudent man, acting in a like capacity and familiar with such matters, would use in the conduct or an enterprise of a like character and with like aims.” Does this means that a plan fiduciary is expected to be an expert in every area of retirement plans?

A plan fiduciary is not required to be an expert in every area, in reality most plan fiduciaries and committee members have little to no experience with investment management. In this case ERISA requires a plan fiduciary to hire outside expertise with the experience and knowledge to help manage plan investments. Historically this role is best performed by an ERISA 3(21) fiduciary advisor.

Does this mean all advisors are a fiduciary to the plan? Most plan sponsors believe their advisor is a fiduciary, but in most cases this is not true. It can be frustrating and confusing to discover the person who was hired to help with the 401k has no real fiduciary responsibility. The new disclosure regulations from the Department of Labor are assisting plan sponsors to know if the advisor they have hired is a fiduciary. As part of the 408(b)(2) disclosures an advisor must disclose in writing if he or she is a fiduciary to the plan.

An advisor who has no fiduciary liability essentially has no accountability for the advice or service that is offered. It is critical for a plan sponsor to understand if the advisor for the retirement plan is a fiduciary. Only a fiduciary to the plan may offer investment advice, monitor investment options with an investment policy statement, and make recommendations for investment replacements as appropriate. Fiduciary advisors may not receive indirect or variable compensation; thus eliminating any potential conflicts of interest in regards to advisor compensation.

A plan fiduciary should consider if having an advisor who is not a fiduciary is able to perform the duties necessary to meet the requirements of ERISA’s definition of “prudent man standard of care.” The prudent response if your advisor is not acting as a fiduciary is to hire one who will.

True Cost Of Fees
The Employee Retirement Income Security Act (ERISA) requires plan fiduciaries to understand, evaluate, and control the fees inside retirement plans. It is both a breach of fiduciary duty and a prohibited transaction to allow a plan to pay more than reasonable expenses. At the same time the retirement plan industry has purposely obscured fees and costs, making a fiduciary’s obligation virtually impossible. Many plan fiduciaries have exposed themselves to substantial liability for failing to clearly identify and understand the total cost of their plans.

The goal of any retirement plan is for participants to reach their individual retirement goals. Unfortunately, the retirement success of plan participants has been put at risk do to hidden expenses, conflicts of interest, and excessive fees. Unreasonable fees can significantly reduce participant returns and diminish account balances over time. Often times plan sponsors do not realize the devastating effects of even a small expense can have on employee’s success.

Cost of Excessive Fees
Consider the cost of excessive fees on a 35 year old employee with a 50k balance with an investment returning an 8% annualized rate of return. Assuming no new contributions his account balance would grow to $503,132 at age 65.

  • An excessive fee of .50% would reduce his account by $65,384 at retirement. To compensate for the fee an additional contribution of $632 would be required every year for 30 years or postpone retirement 2 years.
  • An excessive fee of 1% would reduce his account by $122,520 at retirement. To compensate for the fee an additional contribution of $1297 would be required every year for 30 years or postpone retirement 4 years.

For employees who are younger or employees with larger account balances the damage is even greater. Remember, cheaper is not necessarily better, and higher fees do not guarantee better investment performance or service. It is important to consider fees relative to performance and quality of service. Our experienced Foresight advisors are passionate about your success; this includes an honest and straightforward approach with our clients when it comes to fees.